Welcome to the refining edition of Oil Markets Daily!

Here’s the chronological order of an oil price recovery, write it down, tattoo it on your arm, or whatever you need to remember this.

  1. Refining margins.
  2. Refinery throughput goes up.
  3. Crude prices go up.

The reason why refining margins are so important in the process of an oil market rebalance is that at the end of the day, crude’s only (big) users are refineries. And the refined products produced by these refineries are then used by end-users (e.g. consumers).

So if refining margins are rising in cohort with a rising crude price, it signals one thing and one thing only – demand is improving.

And since what we have on our hands is a situation of demand being low due to COVID-19, and you can see why pretty much every trader on the planet is watching demand proxies.

This is why it was interesting to read the following tweet by GasBuddy:

Gasoline demand came in as the second-highest weekly demand reading since March.

And considering that US gasoline storage is already back to the norm and expected to fall further (thanks to low refinery throughput utilization), and you can see why refining margin proxies are surging.

Over the weekend, we also wanted to gauge the public’s opinion on our refinery throughput assumption.

As you will see in the poll results, the public is pretty split between the outlook. Some are calling it aggressive and some are calling it conservative.

What we know is that given the falling gasoline storage and increasing refining margins, there’s a decent probability that our outlook turns out to be conservative.

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Now as some oil traders will tell you, this is by no means of “real” refining margins. That is true, but the vanilla 3-2-1 crack spreads have been a good barometer of refining margins with the exception of some simple refineries that are at the whims of product quality and such.

But given that gasoline is a big component of the output and we are moving into a gasoline storage deficit situation, we can see how the recent moves in margins are justified.

For now, refining margins have managed to break out the recent range, which is a supportive sign. China’s floating storage is still decreasing. All that’s left is for us to see the physical improvements in Brent time spreads, and we think oil prices will be much higher from here.

Source: Barcharts.com

HFI Research, #1 Energy Service

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